Client Update

’Tis the season for the U.S. Internal Revenue Service to make its annual inflation adjustments to a variety of tax rates and limits, including higher estate and gift tax limits for 2020.  In the coming year, individuals will be able to gift or exclude from federal estate taxes a total of $11.58 million—up from $11.4 million in 2019.  The annual gift tax exclusion—the amount you can give to heirs each year without reporting a gift—remains at $15,000. 

The IRS also lifted the annual limit that can be contributed to a defined contribution (401(k) or similar) plan from $19,000 to $19,500, and people 50 or older can make catch-up additional contributions of $6,500—up from 2019’s $6,000.  The amount you can contribute to an Individual Retirement Account is unchanged at $6,000, with a $1,000 catchup limit for people 50 and older.

If an employer allows after-tax contributions, or if you’re self-employed, the overall defined contribution plan limit was raised from $56,000 to $57,000.

The IRS also changed the tax brackets for working Americans, raising slightly the thresholds for the 10%, 12%, 22%, 24%, 32%, 35% and 37% rates.  The IRS also raised the standard deduction to $12,400 for singles (and married individuals filing separately), $18,650 for heads of households and $24,800 for married people filing jointly in 2020.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice. 

One of the oddities about the American financial marketplace is how so many consumers prefer to keep their assets at the large Wall Street firms—which famously have sales cultures driven by multi-million dollar bonuses to their brokerage sales agents, and whose BrokerCheck reports read more like rap sheets than profiles.  (Don’t believe us?  Type a famous brokerage firm name into the second box in the BrokerCheck website—https://brokercheck.finra.org/—and you’ll get hundreds of thousands of listings of specific broker transgressions, fines, and examples where customers received arbitration awards after various kinds of financial abuse.)

The reason, of course, is that many people feel safer keeping their assets at a very large firm that they have heard of, rather than a smaller financial planning firm; even if that smaller firm often provides more customized service and has renounced predatory sales activities and commissions.  But the interesting thing is that this may be a false comfort; the funds may actually be safer with the smaller planning office than with the larger multinational firm that buys Super Bowl advertisements.

How can that be?  Simple: The vast majority of financial planning firms and investment advisory offices custody client assets with a custodian —meaning that the actual investments and money is housed, not in the basement of the advisory firm or in its computer system, but, most often, at a large financial firm whose sole purpose is to safeguard the money, keep close track of it, and provide statements directly to clients showing that the money is where it is supposed to be.  A financial planning firm could hypothetically custody the assets on their own.  This is not common however, given the rather stringent regulations imposed by the U.S. financial system, and the mandatory audits such firms would be subjected to.

Planning firms outsourcing custody of client assets to a custodian is a very strong “check-and-balance” that is embraced and supported by the smaller financial planning offices and the public at-large.  The planning or advisory firm does not ever have direct access to your money, and therefore would be unable to take it out or otherwise steal or misplace it.

Who are these custodians?  The largest and most commonly used include Bank of NY/Mellon/Pershing, TD Ameritrade Institutional, Charles Schwab & Co. and Fidelity, each of which has between $500 billion and $1.5 trillion in advisor assets under custody.  In contrast with the large Wall Street firms, which have been accused of defrauding customers and routinely appear in the news for regulatory fines, you can Google “examples of institutional custodians losing client money,” and see that there no examples, famous or infamous, large or small, of this important check-and-balance failing retail clients.

 One of the unexpected results of the recent rally in American stocks, combined with a market malaise throughout the rest of the world, is that U.S. companies, in aggregate, now make up more than 40% of the global market capitalization of all publicly traded stocks.  This is up from just over 32% ten years ago.

What makes this more remarkable is that two-fifths of the market opportunities have been generated in a country that makes up just 6.2% of the world’s population.

Japan’s total market cap ranks in a distant second place, with 7.59% of the total—down from 8.02% ten years ago.  But Japan is still punching above its weight; its population represents 1.66% of the world’s total.  Similarly, the United Kingdom’s publicly traded companies make up 4.49% of the world’s total (down from 6.83% ten years ago), while England’s total population is just 0.86% of all the people in the world.

Among other big disparities:  China’s publicly traded companies make up just 7.51% of the world’s total, even though China makes up 18.2% of the world’s population.  The disparity is even greater in India, whose companies make up 2.83% of global market cap despite India representing 17.5% of the world’s population. 

You hear a lot in the press about “elder abuse,” and the image that comes to mind is physical abuse or violence.  But the most likely scenario, according to the AARP, is the 20-year-old son gently accompanying his elderly grandmother to the bank, where she querulously requests a $4,000 withdrawal.  Debra Whitman, executive vice president and chief public policy officer at AARP, estimates that this kind of financial exploitation costs the average victim $120,000, and an aggregate of $2.9 billion a year across the U.S. 

Repeated, out-of-the-ordinary cash withdrawals are the biggest clue to exploitation and scams.  The AARP has recently launched an online training program called AARP BankSafe, which is available to bank and credit union employees who deal with elderly customers.  The program comes out just in time for the holidays, where more family members and friends are in town—who might be ready to take Grandma to lunch, with a quick stop at the bank.

The legal definition of exploitation is abusing one’s relationship—here applied to a relationship with an older relative or friend, to coerce the senior into handing over part of his or her nest egg or transfer property.  It can involve misusing a power of attorney, denying an elderly person access to his or her own money, or withdrawing money out of a senior’s bank account.  Most perpetrators are people known to the victim, such as family members or caregivers in the home. 

Theoretically, tellers are supposed to ask customers a number of questions when they spot a possible red flag, and to call in a supervisor who might intervene.  There is evidence that the approach is becoming at least partially effective.   The AARP has noted that, with increasing vigilance at financial institutions, suspicious activity reports for elder financial exploitation quadrupled from 2013 to 2017, the most recent year that we have statistics.  But even so, these reports may be a small fraction of actual incidents.

For citizens who see elder abuse, the AARP has established a “Fraud Watch Network” hotline: 877-908-3360. 

These days, we use actual paper money and coins less and less often, as credit and debit cards—and, more recently, our phones—handle the payments for what we buy.  Have you ever wondered: what would it look like if we went entirely cashless?

To see, all we have to do is look to Sweden, where the number of kronor in circulation has fallen from 80 billion down to 58 billion in just the last four years—a reduction of 27.5%.  During the same period, ATM withdrawals have fallen by more than half, and more than half of all Swedish banking branches won’t accept deposits or allow withdrawals.  Only sixty percent of Swedes can remember using cash at all in the most recent month.  Many of them use Swish—an app which allows instant cash transfers using just a mobile phone number.  A few thousand Swedish citizens have implanted RFID chips under their skin, so that they can pay with nothing more than the swipe of their palm.

The Forex organization has actually listed Canada as the world’s most cashless country, followed by Sweden, the UK, France and, in fifth place, the United States, just ahead of China.  Australia, Germany, Japan and Russia round out the top ten.  This suggests that the trend will continue—these are, after all, many of the world’s strongest and most advanced economies.  But some observers worry that digital processing of transactions will erode the meaning of a country’s currency—the end, if you will, of state money, of the kronor, Canadian dollar, the pound, franc and U.S. dollar.  Indeed, a recent proposal—not yet acted on by any government—would replace the dollar as the world’s reserve currency with a jointly-issued cryptocurrency that everyone would use, to be called the Synthetic Hegemonic Currency.  No, paying with Synthetic Hegemonic Currency units is not very catchy, and cryptocurrencies so far have a bit of a sketchy reputation.  But you can bank on seeing fewer bills and coins in the future than you have in the past.

This article was written by an independent writer for Brewster Financial Planning LLC and is not intended as individualized legal or investment advice.